Ryan Leggio: Initially we would like to highlight the key FPA Paramount Fund attributes for those of you who may be listening in for the first time, and I’ll quickly mention a few of these attributes. First, the Strategy is run with an absolute value philosophy. The team seeks genuine bargains in the equity markets rather than relatively attractive ones. Second, the FPA Paramount Fund has a broad benchmark-agnostic mandate. By broad, we mean the team can invest in equities in both developed and emerging markets, and across sectors. The team can invest in companies with a market cap as small as $2 billion and as large as $300 billion-plus.

By benchmark-agnostic, we mean that the team’s starting position is cash, rather than the MSCI All Country World Index’s geography or sector or market cap weightings. That being said, as the team invests around the world, the FPA Paramount Fund will usually maintain a minimum of 20% exposure to U.S.-domiciled companies and a minimum 20% exposure to ex-U.S.-domiciled companies. This still affords the Strategy significant investment flexibility. For example, U.S.-domiciled companies are roughly a 50% weight in the MSCI ACWI Index as of the end of the third quarter.

Finally, the FPA Paramount Fund is relatively concentrated, as the team focuses on only high-quality companies that trade at a significant discount to the team’s estimate of intrinsic value. It is important to note that the Fund can be more concentrated than most other world equity strategies given its non-diversified status, which allows the team to concentrate the Fund’s assets in their most compelling opportunities.

(2:03) And with that, I would like to turn it over to Greg Herr. Over to you, Greg.

FPA Paramount Fund’s Greg Herr on the 3Q fund performance

Greg: Okay, thanks, Ryan for the introduction, and thanks everyone on the call for taking the time to be with us today. We’re going to start with performance, and during the third quarter the FPA Paramount Fund declined 9% compared to the MSCI All Country World Index’s decline of 2.3%. Year-to-date that translates into a total return of negative 5.6% for the FPA Paramount Fund versus a 3.7% gain for the Index. Since the third quarter of 2011, the FPA Paramount Fund has appreciated 17.7% annualized versus a 16.6% gain for the Index.

So let me start out by saying the obvious. This was a bad quarter for the FPA Paramount Fund from a short-term performance perspective. We took advantage of the opportunities in the market to invest in four new companies and to consolidate positions on two that we had added at the very end of last quarter.

Most of these companies we had followed for a long time, and during the quarter they experienced price declines, which gave us the opportunity to invest. To put the activity in perspective, we deployed a little less than a fifth of the FPA Paramount Fund’s assets toward newly built positions during the quarter. They include two names that we started buying right at the end of last quarter, which was adidas AG (ADR) (OTCMKTS:ADDYY) (ETR:ADS) and TNT Express NV (AMS:TNTE) (OTCMKTS:TNTEY), as well as four new names that we added to the portfolio this quarter, which include ALS, Hypermarcas SA (BVMF:HYPE3), and Prada S.p.A. (HKG:1913), and then one additional name that we haven’t disclosed because we’re still in the process of buying it.

It’s also important to note that while the Index as a whole fell only 2% in the quarter, the companies I just mentioned had share prices drop anywhere between 15 and 45% during the period. (4:04) So the price declines for these companies occurred despite what we think are little change values for the businesses. That means that right now we believe they sell at significant discounts to our estimates of their intrinsic value.

So that’s what we did in response to the more fruitful environment. Now let me turn to the three issues which we believe especially hurt performance in the quarter. First is currency—both the euro and the British pound fell significantly versus the dollar this quarter. With the majority of the portfolio companies still domiciled in Europe, this had a negative impact on performance.

The following comes from Part I of Big Debt Cycles, which is available for free here: https://www.principles.com/big-debt-crises/.
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